Let’s rewind to the mid-1990s. Jean Chretien had just been elected Prime Minister, grunge ruled the music world and too many people were wasting their time following the OJ Simpson murder saga (myself included). But the biggest news in Canada was a steady drumbeat of articles and news stories about how the Canada Pension Plan was in dire straits. According to the media – mostly the right-wing Sun chain, but also in the mainstream outlets - it was highly unlikely that most people alive at that time would ever be able to collect a dime from their CPP contributions because of ‘massive’ funding shortfalls. At best there would have to be huge tax increases and severely reduced benefits. Scarcely a day went by without more doom and gloom predictions from purported experts such as the University of Calgary economist Jack Mintz and the policy ‘wizards’ at the Fraser Institute.
There were a lot of lies spread about the CPP. It was said that because the government was running large deficits, that eventually they would take the pension money to cover their ballooning debts; such a move would have been completely illegal. In the usual right-wingnut way, they also claimed the government was lying about how bad the numbers for CPP were; the CPP’s books are regularly examined by the fully independent Chief Actuary. But mostly, the wave of fearmongering was brought about by an ideological fallacy - the government can’t run a pension because the government can’t run anything, it screws up everything it touches. I particularly remember the odious Calgary Sun columnist Paul Jackson relentlessly carping on this, while further insisting that government pensions were immoral and needed to be done away with as soon as possible to save Canada from bankruptcy and communism.
Yeah, so none of that happened. There was a kernel of reality behind the panic, as the numbers did look stretched if you went out far enough. In 1997, the CPP admitted that there could be a shortfall in the future. But the problems were easily fixable: the Chretien government doubled contributions (a small tax hike when you consider that most of the increase in CPP premiums was offset by a reduction to EI contributions) and installed an investment board to help oversee the fund. The changes worked very well; over the last 10 years, the CPP has had the best returns of any pension fund in the entire world, returning almost 11 percent per year, which is 47 percent greater than the average pension fund’s performance. It has never cut benefits or raised the retirement age, much less missed payments. According to the Chief Actuary, assuming an average rate of return the CPP is fully funded for the next 75 years. And last I read, Paul Jackson had retired to Mexico, no doubt gleefully collecting his 'socialist' government benefits without an ounce of remorse.
The remedy most often offered by critics was privatization. (Shocking!) The CPP has about $570 billion in assets. Its admin costs come in at roughly one percent. Since it's run by the government, it doesn’t need to make a profit for anybody, so that one percent is the whole cost of having it. Compare the cost of CPP to Canadian mutual funds, which on average charge their clients 2.2 percent per year on their assets. This difference of about one percent may not seem like much but over time it really adds up. One percent of $570 billion is $5.7 billion a year, and if you compound that for 20 years at just 5 percent, you get $214 billion. This should tell you how much having a government run pension fund is saving us. But then add to this the fact that the CPP has outperformed every single mutual fund in Canada and it should be abundantly clear that privatizing the CPP would have been monumentally, catastrophically stupid.
Here in good ole Alberta, a lot of the same people who maligned the CPP in the 90s - never admitting they got it completely wrong - quickly latched onto a new line of attack. In 2001, a future Prime Minister, Stephen Harper, and three University of Calgary professors penned the infamous Firewall Letter, which advised then Premier Klein to take various measures to protect Alberta from the evil federal government. Part of the "firewall" was a plea to remove Albertan’s money from the CPP and give it to the provincial pension fund, AIMCo. The authors claimed that benefits would remain the same but it would cost Albertans less and they provided exactly zero evidence to back this up. ( If I wanted to get personal, I would point out that the authors of the letter are now collecting extremely generous pensions that other people paid for. But I don't want to get personal...)
So how would that have worked out? AIMCo has returned 7.2 percent per year over the last ten years, which is slightly below average for a pension fund and, more importantly, about 50 percent less than CPP returned in the same time period. In 2020, AIMCo’s CEO resigned when it was revealed the fund lost $2-3 billion in a single risky bet against market volatility. It was a trade that no pension fund should ever make and called into question the fund’s risk management. The bigger problems with AIMCo are a lack of diversification and that it seems to be unduly influenced by political considerations. AIMCo is much more exposed to the oil and gas sector (and the Alberta economy in general) than the CPP is, and as this industry inevitably struggles down the road, it’s likely that there will be political pressure to prop it up using the pension fund. (It's already happened, and this detailed report about what the Kenney government did should be required reading for all Albertans.) It’s easy to imagine a scenario where the damage from a rapidly declining economy due to decreased oil and gas consumption is then compounded by large losses on energy investments in the pension fund. And since royalties and taxes would therefore also decline precipitously, there wouldn’t be any money to plug the holes.
All of this is lost on Alberta Premier Danielle Smith, who during the recent campaign in May expressed her fervent desire to get Alberta out of the CPP. She quickly stopped bringing it up because it didn’t seem to resonate with Alberta voters. But I’m pretty sure we haven’t heard the last of this; it’s likely a referendum on pensions is coming in the near future. It will be interesting to see the premier try to put lipstick on this pig. The facts are stacked heavily against Smith, but of course that’s never stopped her before. When all the panic over CPP happened in the 90s, I actually thought there might be something to it and adjusted my mother’s finances to take the possibility into account. That was a mistake. I won’t get fooled again, and neither should you.
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